Fragmentation of world trade

“Fragmentation” is the latest buzzword that’s being used to describe what could be a new economic era in the world, quite distinct from the decades of its predecessor that everyone knows as globalization.

Just before the Second World War ended in 1944, the United States and its allies met in Breton Woods to liberalize trade and revive economic growth. The conference, which was formally known as the United Nations Monetary and Financial Conference, was attended by 44 Allied nations.

Three years later, in 1947, the first worldwide multilateral trade treaty known as General Agreement on Tariffs and Trade (GATT) was signed by 23 countries to minimize barriers to international trade by removing or reducing quotas, tariffs, and subsidies.

Russia, which had repudiated the Breton Woods Agreement, was excluded from participating in GATT, resulting in its further isolation from the trade order that other countries in the west were in accord. Only when the Soviet Union collapsed in 1991 would Russia eventually, after two decades, be allowed to participate in free market economics.

A decade earlier, in 2001, China had joined the World Trade Organization (WTO) but only after a long and contentious debate that delved on the perceived structural differences between the free world trade ideology and that of an Asian economy emerging from a communist-based order.

(Note that the WTO was formally in existence in 1995 to replace GATT. Its operational framework was modernized to facilitate trade in goods, services, and intellectual property among participating countries. The WTO oversees negotiations in trade agreements between and among countries.)

Free world vs Communist order

Like China, Russia’s access to membership in the WTO in 2012 had been controversial. It was ironical that while being a member of the G8, G20 or the UN Security Council, Russia did not have a single say in WTO meetings despite being the world’s largest economy.

Like China, the issues were largely centered on its ideology as a socialist economy where state political reach in the domestic economy was not looked upon kindly. Many saw Russia’s perseverance to join the WTO as politically motivated.

In fact, in a 2002 speech given by Russian President Vladimir Putin, he stated that WTO accession “is not an absolute evil and not an absolute good. And it is not an award for good behavior. The WTO is a tool. Those who know how to use it become stronger.”

Putin’s statement became increasingly ominous viewed from Russia’s 2014 forcible annexation of Crimea away from Ukraine. But it was only last year, after a major offensive on Ukraine’s northern and eastern flanks, that the West felt seriously threatened by such aggression.

The sanctions drawn up by European countries that were members of the North Atlantic Treaty Organization (NATO), including the United States, against Russia following the 2022 attack on Ukraine, demonstrated signs of the fragmentation phenomenon, although such shifting of world order had started earlier with a different set of countries.

‘Ridiculous’ trade deals

In 2017, the United States voted Donald Trump as president. As a candidate for the presidency, Trump was very vocal against traditional bipartisan trade agreements, which many of his business supporters considered as reasons for the decline of jobs, wages, and profits.

On his first full weekday in office, Trump abruptly ended a 12-nation Trans-Pacific Partnership (TPP) agreement with a stroke of a pen, and more importantly, declared the end of an era of multinational trade agreements by declaring war on foreign competitors through an “America First” dogma.

“We’re going to stop the ridiculous trade deals that have taken everybody out of our country and taken companies out of our country, and it’s going to be reversed,” Trump had said. Then, he quickly called for a renegotiation of the North America Free Trade Agreement (NAFTA), a signal of creeping protectionism by a formerly pillar of free trade in global economics.

Trump’s initial salvo was ambiguous about how he perceived China in the wider scheme of things, but eventually, by September 2019, half of the goods traded between the US and China would carry tariffs resulting from the now infamously documented US-China trade war. Joe Biden, who succeeded Trump in 2021, kept the tariffs in place.

‘Economic security first’ policies

During the just-concluded World Economic Forum in Davos, Switzerland, prominent business leaders and country representatives echoed the fragmentation concern that the International Monetary Fund (IMF) had earlier said could contribute to a worsening of the global economy.

The finger-pointing by affected nations, many from the European bloc, as well as from developing and least developed countries, was clearly at China and the US, two major countries in the world that championed either overtly and covertly an “economic security first” protectionist policy.

China is accused of openly enticing companies in the West to relocate part or all of their operations, aside from forcibly imposing conditions for the transfer of technology and abandonment of intellectual property rights.

The US, on the other hand, is being criticized for flooding billions of dollars to attract or keep companies within its borders. For example, the recently passed Inflation Reduction Act is criticized as blatantly protectionist by stipulating that subsidies for electric vehicles can be claimed only if these were manufactured in North America.

The IMF warns that the global economy’s fragmentation could, in the long term, cost the world up to seven percent of its gross domestic production (GDP), which is roughly equivalent to the combined output of Japan and Germany. And if a technological disconnect happens, the world may lose as much as 12 percent of GDP.

(More next week.)

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